Ambassador Susan Schwab (second from left), United States Trade Representative, and David Emerson (second from right), minister of international trade, sign the softwood lumber agreement in Ottawa, September 12, 2006. They are flanked by David H. Wilkins, United States ambassador to Canada (left) and Maxime Bernier, minister of industry (right). Photo: Jean Levac, PNG files.Jean Levac
/ Jean Levac / The Ottawa Citizen

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In 2011, the B.C. forest industry returned nothing to investors who have been waiting since before 2005 for a return on their capital that matches the risk of putting their trust in a cyclical industry beset with problems.

Consultants PwC, who track industry performance, say that even though the B.C. pulp sector turned in a relatively good performance, lumber companies were hammered by low commodity prices — and that’s on top of challenges like the mountain pine beetle and taxes on American softwood lumber sales.

PwC is now analyzing data on the year, but preliminary indications are that 2011 was another dark period for the beleaguered industry.

“Return on capital employed [ROCE] is going to be very poor,” said Kevin Bromley, a partner in PwC’s forest and paper practice in Vancouver. “It’s likely going to be zero.”

Chronically poor returns are keeping the industry from realizing its potential, said Bromley. “We are reliant on commodity markets, but we should be extracting more value from the fibre,” he said.

But developing new, value-added products — such as biofuels and nanofibres — will take more capital. To attract that capital companies must be more profitable. And for profits to climb, it’s going to take stronger pricing in global markets.

Most observers don’t see that happening until 2013. Some, like Bromley, see a gradual increase in demand and prices as the U.S. economy and housing sector starts to recover.

Others, like consultant Peter Woodbridge, are forecasting a “super-cycle” that will push prices up dramatically, fuelled by beetle-driven supply-side shortages and declining timber strength in third and fourth-generation yellow pine plantations in the southern United States.

“Consolidation has been happening [among U.S. distributors], but now even those consolidated companies are disappearing,” said Woodbridge.

“There was the equivalent of a 50-inch pipeline [for lumber distribution between Canada and the U.S.] at one time. It has now shrunk to a fraction of that. There will be impediments getting stuff to markets. People will hardly be able to get what they want. There will be big price spikes, not just for primary products but value-added products.”

Ironically, the challenges facing the industry — timber shortages; a decimated remanufacturing and distribution system in the U.S., where demand for forest products has been at near-record lows for five years; and falling market share in the U.S. attributable to the 2006 Softwood Lumber Agreement — should become opportunities for B.C. forest companies as the turnaround kicks in.

The softwood lumber tax rate, which has added 15 per cent to the cost of B.C. lumber in the U.S. for the last five years, drops as the price of lumber climbs, in accordance with the terms of the 2006 softwood lumber agreement. Prices have improved this year to the point the tax is now only 10 per cent. By 2013, if the super-cycle emerges, the tax should disappear.

To overcome the supply problems, companies are already positioning themselves.

Canfor Corp. president Don Kayne sees fibre as a major challenge.

“For us, the key factor is fibre supply, and making sure that whatever we do is based on strengthening our fibre position, which we have been focused on for the last few years,” Kayne said.

“We think that is absolutely critical to our long-term sustainability and success.”

To achieve that long-term sustainability, Canfor has invested in technology to better convert pine beetle wood to lumber, as well as in timber tenures in the province’s southeast, which was largely spared by the beetle.

Canfor and rival West Fraser also have strong balance sheets as they emerge from the recession, which gives them the ability to attract fresh capital.

Strong balance sheets are what investors are looking at now, Bromley said, until the forest sector can get its earnings back on track. He noted, however, that B.C. companies are still small on the global scale. Of PwC’s top 100 forest companies in the world, Canfor’s rank was only No. 44.

Bromley expects to see consolidation as lumber companies strive to keep up with customers like Home Depot, which has a market capitalization 70 times as large as Canfor’s market cap.

As the larger companies grow, however, a new generation of forest companies will likely rise to fill the middle ranks of the B.C. industry, says John Innes, dean of the faculty of forestry at the University of B.C. These companies, he says, will be 21st-century versions of the smaller, family-run businesses that were bought out a decade ago.

One of those companies is Conifex, formed in 2008 from the insolvencies of lumber and pulp giants AbitibiBowater and Pope & Talbot. Conifex acquired AbitibiBowater’s Mackenzie sawmill and paper plant and Pope & Talbot’s Fort St. James sawmill.

To overcome the challenges facing an industry where there are fewer distribution channels because of consolidation, Conifex president Ken Shields relies on the flexibility of the mid-sized newcomer to be able to produce products for a number of markets, rapidly switching production to meet the particular demand in each market.

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